Fintech innovation continues to eat into the traditional financial services and banking markets. Deloitte recently reported that fintech investments soared in 2021 to $131.4 billion. This was up 144% from the $53.9 billion of funding in 2020.
In a related trend, ‘Web3’ technologies including cryptocurrency (crypto), non-fungible tokens (NFTs), decentralised finance and distributed ledger/blockchain more generally, are becoming an ever larger slice of the global economy.
It is common for fintech or crypto startups to serve an international customer base. This is, perhaps, unsurprising given the fintech focus on cross-border payment solutions and the potential for crypto to serve as a hedge against international currency fluctuations.
1. The incorporation challenge for cryptos and fintechs
Fintech and crypto businesses are somewhat boom or bust. While many do well, a higher than usual proportion will probably fail. This means:
- Startups can’t afford to be bogged down in red tape. Compliance requirements need to be kept to a minimum, so directors can remain laser-focused on revenue generation in the crucial early phase of the business.
- Careful tax planning. In the early years, startups need as much cash on hand to reinvest as possible, so it’s crucial to keep the tax bill as low as is legal and manageable.
- Choosing an attractive location. The jurisdiction of incorporation must have a credible international reputation. Not only that, the ability to quickly scale the business is paramount. If the business takes off, Cayman may be more attractive for international investors and partners than Australia. Geographical proximity might also make it easier to open up US branches as the business grows.
- Planning for success: If the business takes off, a jurisdiction with less regulation and lower taxes will help the business to move from a startup to a growth phase.
Setting up an overseas company, such as a Cayman entity, presents a challenge for Australian entrepreneurs. However, they do not nullify their tax obligations in Australia simply by incorporating overseas. The Australian startup founder is likely to still have personal income tax obligations in Australia, and may also have corporate income tax obligations there, despite incorporating overseas. Careful tax planning may include the founders basing themselves in an offshore jurisdiction to ensure that the business qualifies for tax residency offshore. We explore this possibility in detail in this guide.
While our focus in this guide is on Australian entrepreneurs setting up a Cayman entity (namely, a private exempt company limited by shares), it is not the only attractive location for ‘offshoring’. Other popular locations for incorporating international business in the Caribbean include Nevis, the British Virgin Islands, Bermuda and the Bahamas. Due to its popularity, our focus here is just on the option of Cayman set up.
2. What is the process for setting up a fintech or crypto startup in Cayman?
If you have decided on the Cayman Islands, what process should you follow for getting started there? We explain the regular incorporation and setup process for startups in Cayman, as well as the ‘special economic zone’ (SEZ) procedures which may be available specifically for fintech and crypto startups.
2.1 The different types of Cayman entity
The first step for setting up a Cayman company is to incorporate the Cayman entity. The main types of legal entity used for offshoring in Cayman are an exempt company limited by shares, an exempt limited partnership and a limited liability company. We consider each in turn:
- An exempt company limited by shares (exempt company). This entity has a similar basic structure to an Australian limited company, with directors and shareholders who contribute share capital. The liability of shareholders is limited by their share capital. It is an ‘exempt’ company, as it is exempt from many of the rules that would apply to other Cayman companies on the basis that it is not allowed to carry out business directly in the Cayman market.
- An exempt limited partnership (ELP). This structure has some similarities with an Australian limited partnership. A general partner or partners run/s the company with unlimited liability. Limited partners invest in the business and limit their liability by their contribution, but are not allowed to actively take part in the running of the business. Generally speaking, this structure wouldn’t be appropriate for a small fintech/crypto startup, as those who operate the business (the general partner/s) have unlimited liability.
- A limited liability company (LLC). A similar basic structure to the most popular US corporate form, the Delaware LLC. This is a flexible corporate form, marrying aspects of the exempt company and the ELP. An LLC does not have required share capital, and is governed by an LLC agreement, giving members more latitude to determine how the company is run.
In this Guide we focus on the exempt company as that is the most common form of Cayman entity set up by an offshore individual or business. In the past this type of company has been referred to as an International Company or an International Business Company in offshore jurisdictions.
2.2. Key features of an exempt company
For any Australian entrepreneur, it is worth examining the core features of an exempt company in Cayman and noting how they differ from an Australian limited liability company (a Pty Ltd).
The exempt company must have a legal name that does not include prohibited or regulated terms (such as references to ‘Royal’ or ‘Bank’). It is also prohibited from having the same name as existing Cayman entities.
Registered address and agent
You must have a registered agent to represent your exempt company in Cayman, as well as a registered business address in Cayman.
The exempt company must have at least one shareholder, who may be either a natural person or a body corporate (for example, an Australian limited company could be the sole shareholder in a Cayman exempt company). The shareholder could also be the trustee of a trust (whether settled in Cayman or elsewhere).
The exempt company must have at least one ordinary share (i.e. a share with voting rights). There is no minimum required share capital, and the share capital may be in any major denomination. Note, however, the amount of share capital will affect the payable incorporation fee (more on this below).
Shares may be registered (in which case the holders of those shares become ‘members’ or ‘subscribers’). But Cayman also permits unregistered ‘bearer shares’. These shares are evidenced only by the possession of a document attesting to the ownership interest. The holder of a bearer share is unregistered and this type of share is not available for Australian companies.
Register of members
Where the exempt company has members, it is compulsory to keep a ‘Register of Members’. However, this does not need to be kept at the registered office of the company, nor does it need to be generally available to a government authority for inspection. It must be provided only where an order for production under the Tax Information Authority Act (2021 Revision) is made.
Register of beneficial ownership
The beneficial owners of the company are those who ultimately ‘benefit’ from the ownership of the company. It is compulsory to keep a register of the ultimate beneficial owners of the Cayman exempt company (such as beneficiaries of an Australian or other overseas trust).
This Register must be kept at the registered office of the company. It must also be uploaded to the Cayman Islands General Registry (General Registry)— though the information is encrypted and immediately transferred to an offline server to maintain data security.
The company must have at least one director but they need not be a resident in Cayman. As in Australia, the directors of a Cayman exempt company are the ones who ultimately ‘run’ the company (whether directly, or by appointing professional managers).
There is no requirement to appoint ‘officers’ (those who act in the name of the company), nor to appoint a ‘company secretary’, though it is common to do so.
In Cayman, the director may be a natural person or a body corporate (this means, for example, an Australian limited company set up by the startup founder could itself be the sole director for a Cayman exempt company).
It is also possible to appoint a ‘nominee director’. A nominee director is a local professional director who is a director for many different companies and can act on the instructions of a third party (such as an Australian entrepreneur).
A Register of Directors and Officers must be kept by the business, and submitted to the General Registry within 60 days of first appointment. Note, this information is not made publicly available. The writer understands that a person may obtain the information by making an in-person request in the Cayman Islands itself.
As in Australia, directors of a Cayman exempt company have a range of duties under statute, common law and equity. This includes a duty to act in the best interests of the company and a duty not to improperly profit from it.
There is no corporate income tax in Cayman. Nor is there a tax on shareholder’s dividends, a capital gains tax, value-added tax/goods and services tax, nor do import and export duties apply. This is in stark contrast to Australia, which applies a tax in all of those categories.
Exempt companies can apply to the Cayman government for a Tax Exemption Certificate (TEC) which will guarantee no taxes for the company for a set period, such as 20 years.
In lieu of taxes, Cayman exempt companies pay set fees to the Cayman Islands government for operating an offshore company there.
An annual return must be filed each year. Note, there is no requirement to prepare or submit financial statements, nor to have such statements audited.
Books of account
Despite there being no requirement for submitted financial statements or audited accounts, proper financial records must be kept.
There is no requirement that an annual general meeting (AGM) be held. It is a requirement for certain matters that a special resolution of the shareholders of the company be passed.
The company must have a Memorandum of Association (memorandum) and Articles of Association (articles), which are filed with the General Registry. As with the other registers that are required to be filed, this information is not made publicly available.
The memorandum specifies the company name, the registered office address, the objectives of the company, the type of company (in this case, an exempt company), the initial capital and the type of shares (e.g. ordinary, preferred, bearer shares).
It also includes the names, addresses and signatures of the initial subscribers (the first registered shareholders of the company), as well as the number of shares taken by each subscriber, the name and signature of witnesses and the date of execution. The articles regulate the operations of the company, such as the powers of directors and officers.
In addition, subscribers to initial shares must swear a witnessed affidavit that the company’s objects will be carried out outside of Cayman.
2.3. The key steps for setting up a Cayman exempt company
Once you have decided that you wish to incorporate a Cayman company, you should begin the incorporation process.
- Consult with a registered agent in Cayman. The best advice is to go directly through a lawyer or accountant in Cayman that is also a registered agent, rather than through an intermediary that runs a website.
- Choose a name, and ensure that it is compliant with the General Registry. Two alternate names should also be submitted for consideration, in case the preferred name is unavailable.
- Draft a company memorandum and articles. There are draft documents available in the Cayman Islands Companies Law, or you can construct your own (with legal guidance).
- Determine initial share allotment and select directors. An initial share capital of US $50,000 is common as this is the maximum allowable share capital in order to pay the minimum government fee for incorporation. Share capital can be limited below the allotment amount and called up over time.
- Provide a registered address for the company. Your registered agent/service provider is usually able to provide this.
- File documentation with the registry. The company is usually incorporated within four days of submission and a certificate of incorporation will be sent to the registered address.
Incorporation as a special economic zone company
New or existing Cayman exempt companies may apply to be registered as a special economic zone company (SEZ company).
The purpose of the SEZ is to attract science, technology, financial product/services, maritime, media and educational businesses to the country. Clearly, this would cover many fintech and crypto businesses, so incorporating as an SEZ company is an option.
The advantages of incorporating as an SEZ company include:
- A streamlined application process, usually meaning incorporation within ten days.
- Additional protections for intellectual property.
- Employees automatically granted five year work/residency visas.
- No restrictions on the transfer of any investment within the SEZ.
The steps for setting up a SEZ company are:
- Apply to Cayman Enterprise City (CEC) for examination of the business. CEC will determine whether the business is eligible to be a SEZ.
- Adjust the memorandum of the company to recognise the company’s objects relating to the SEZ requirements.
- Submit incorporation documents.
- Apply for a SEZ trade certificate specifying the intended business. A fee must be submitted at this time.
Finalise SEZ company arrangements
Once incorporated you should:
- Submit an application for a Zone Employment Certificate (giving employees the right to live and work in Cayman for five years).
- Consider purchasing a serviced office option. You need somewhere to work without needing to setup the ethernet cables yourself or sign up to a long term lease on premises.
- Work on a 1-2 year plan to grow the business whilst residing in Cayman.
The total cost (as of 2022) is about USD $20,000 USD in total, plus a monthly desk fee for a serviced office within the CEC hub.
Consider any other necessary licences
Like Australia, Cayman requires some fintech and crypto businesses to hold a licence. Licences are issued and administered by the Cayman Islands Monetary Authority (CIMA). This covers:
- banking services;
- money services;
- insurance providers;
- investment funds; and
- securities products and advice.
CIMA also regulates ‘Virtual asset service providers’. This means a licence is required for any business that:
- issues virtual assets;
- provides an exchange between virtual assets and fiat currencies;
- provides an exchange between one or more other forms of convertible virtual assets;
- transfers virtual assets;
- provides a virtual asset custody service; or
- participates in the provision of financial services related to a virtual asset issuance or the sale of a virtual asset.
Temporary licences are also available under CIMA’s ‘sandbox’ arrangements.
3. Why choose Cayman Islands?
As mentioned, Cayman is not the only zero-tax or low-tax jurisdiction, nor is it the only option in the Caribbean. So, why Cayman?
The CEC option is a very cheap startup option for new fintech or crypto firms, given that it is an ‘all-inclusive’ model. For the initial set up price, the company is incorporated, residency and work permits are arranged and the business is ready to go. While some digital nomads may think they can avoid these costs by jumping between Phuket and Bali, and avoiding the watchful eye of the taxman, this is no recipe for success. Other businesses, lenders and customers want to deal with an established and trustworthy corporate presence and a healthy internet connection for virtual meetings.
There have been threats to financial influencers (‘finfluencers’) by the Australian Securities & Investments Commission (ASIC) — it seems likely that Australia will more tightly regulate fintech and crypto in the future. If you hold a contrarian position then you may be at risk of prosecution by ASIC by advocating cryptocurrency or investments that are seen as too risky for the regulators.
While Cayman has a licensing framework (see discussion of CIMA above), it is relatively permissive making it much easier for cryptos and fintechs to scale for investment with few restrictions.
Robust legal system
As a British Overseas Territory, Cayman has a common law commercial legal framework similar to Australia and the United Kingdom. Trust and corporate structures, director’s duties and remedies are relatively similar to what exists in other countries. It is also a reliable court system, with the highest court of appeal being the Judicial Committee of the Privy Council in London. This may give potential investors comfort to give you their money to help grow your business.
As an ‘offshore business’, the business is based in Cayman, but not conducting business ‘in’ and ‘with’ Cayman. This is what makes the company an ‘exempt’ company. In short, it’s a home but with no less responsibilities.
There is no personal or corporate income tax, no capital gains tax, nor import duties applied in Cayman. There is therefore no need to even prepare tax returns in Cayman. As mentioned earlier, it is possible to apply for a TEC to ‘lock in’ these tax benefits.
It is worth noting the moves afoot to introduce a global corporate income tax minimum of 15 percent. While this would obviously reduce the tax advantages of incorporating in Cayman, it remains to be seen if those measures will be passed into law.
Cayman trusts and ‘foundation companies’ can be created to transfer assets from an individual, and potentially protect those assets from creditors. This could be a useful additional protection for fintech or crypto founders who set up an exempt company in Cayman. Since there is no public register of the trust, this information is essentially inaccessible.
There are limitations on this, of course. Any fraudulent transaction transferring assets into one of these vehicles could be unwound. But there is also a potential practical benefit for Australian entrepreneurs — it will be much more expensive and complicated for an Australian insolvency practitioner to claw back assets from a Cayman entity than an Australian one.
Privacy, confidentiality and data security
Look up the Cayman Islands Registry of Companies. Now look up ASIC’s company search in Australia. What’s different? Cayman provides no details about directors, members or officers. Nor is it possible for the public to access company documents. It is not even possible to check that the company is in good standing.
Privacy protections are also enhanced by the ability to appoint bodies corporate as directors (i.e. individual entrepreneurs do not have to themselves be a director, but can control the company that is a director), and the permissibility of bearer shares (i.e. completely anonymous, unregistered, transferrable shareholdings).
It is a convenient time zone for North American business. It also means short flights to the United States (approximately one hour to Miami, three to New York) for business. There are also regular flights from London.
Efficient business setup processes
As long as documentation is in order, companies are incorporated quickly. Shelf companies are also available.
The War in Ukraine has been an important reminder that security is not guaranteed in ‘the west’ (note crypto businesses in Ukraine that had to flee). With the post-pandemic world looking like a powder keg of inflation, nationalism and disruption, it is a mistake to base a startup in anywhere that is politically instable.
Cayman has a robust banking sector (111 banks, including subsidiaries and branches of many major international banks), making it relatively straightforward to set up a local corporate bank account (though this is not a requirement of incorporating there).
4. Will your business have to pay corporate income tax in Australia?
By incorporating an exempt company in Cayman, and otherwise setting up your business there, you will be looking to acquire corporate tax residency in Cayman. However, it does not necessarily follow that you have lost tax residency in Australia.
Losing corporate tax residency in Australia would be ideal for most startups — it means more flexibility, less compliance and probably a lower tax bill in the long term.
So what is the test for corporate tax residency in Australia? To be a corporate tax resident the company needs to be either:
- Incorporated in Australia (obviously doesn’t apply here), or
- One that ‘carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.’
This presents a hurdle for any startup founder that wishes to stay physically resident in Australia, but operate through a Cayman exempt company. This means that, to avoid corporate income tax, the founders/directors likely need to be based outside Australia (i.e. in Cayman). This is because:
- The court (see Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation  HCA 45; 2016 ATC 20 589) and the Australian Tax Office (ATO) have recently interpreted the management and control of a corporation as itself an instance of ‘carrying on a business’. So by controlling the Cayman exempt company from Australia, the founder would remain a corporate tax resident of Australia.
- The founder is likely to control ‘voting power’ in the Cayman exempt company.
In Bywater, the individual who controlled the business was based in Australia and used a ‘nominee director’ overseas. That is the individual was not officially a director of the company, but the overseas director acted on their instructions.
Similar reasoning would mean that a bearer share structure may also not be enough to avoid the Australian tax authorities. They are perfectly willing to ‘look through’ any existing structure to see who really controls the enterprise.
There is also the issue of practically overseeing business from Australia without otherwise engaging in activities that would indicate the founder was ‘carrying on a business there’, such as employing Australians or using Australian bank accounts. Using a sham transaction model to attempt to avoid taxes carries a significant long term risk – authorities continue to catch up with director ‘tricks’ and will have no hesitation in taking legal action. The more the business succeeds and grows the higher the chance of being subject to a tax audit and ultimately to having Australian taxes levied.
Note, even where the business is not a corporate tax resident in Australia, it can still be liable for tax there as a non-resident company where it has a ‘permanent establishment’ in Australia (see 6(1) of the Income Tax Assessment Act 1936). This is a ‘fixed place of business’ through which the company wholly or partially carries out its business.
A permanent establishment specifically includes ‘places of management’.
It is also worth noting that an Australian corporate tax resident or permanent establishment is likely to be liable for capital gains tax (CGT) for the sale of any business assets.
To sum up, if an Australian fintech or crypto business founder is planning to operate an offshore company from Australia, they are likely to be liable for corporate income tax in Australia (perhaps defeating one of the purposes of setting up the company offshore). If they are planning to start their business in Cayman they should live there too and undertake careful tax planning to ensure that they don’t wrongly assume they have avoided Australian corporate tax residency.
5. Will you still be liable for personal income tax in Australia?
Even where the entrepreneur/startup founder has based themselves in Cayman, and avoided Australian corporate tax residency, they are unlikely to be able to avoid personal tax residency in Australia (at least initially).
If the individual grew up in Australia and has lived there long term, tax residency would be presumed. To understand why, it is necessary to look at the four tests that the ATO uses for determining tax residency for personal income purposes:
The resides test
The primary test is known as the ‘resides test’. Any individual who resides in Australia is considered an Australian resident for tax purposes. If this test applies, there is no need to consider the other three tests (discussed below).
Some of the key factors used to determine residency under this test include:
- Physical presence in Australia.
- Intention and purpose. Through their actions, an entrepreneur may indicate that they intend to be in Australia for an extended period.
- Family presence in Australia.
- Business or employment ties.
- Social and living arrangement.
- Maintenance and location of assets.
If an individual does not meet the resides test, they will be assessed against the other three tests.
An individual is an Australian resident for tax purposes if their domicile (their permanent place of abode) is in Australia. It may be the individual’s domicile by origin, or by choice.
The ‘permanent place of abode’ test is very hard to dislodge for Australians. It is designed to make sure that a double tax treaty is required for recognition – there are no double tax treaties with zero tax jurisdictions for obvious reasons.
An individual becomes a resident under this test if they are actually present in Australia for more than half the income year, either continuously or with interruptions.
The Commonwealth superannuation test
As this test only applies to Australian Government employees based in posts overseas, it is irrelevant for the purposes of a fintech or crypto startup founder.
6. The tax risk of crypto
Many entrepreneurs may be tempted to hold assets in cryptocurrency in order to lessen their tax bill. Any business doing so needs to carefully consider the difference between ‘tax avoidance’ and ‘tax evasion’. In R v Mears (1997) 37 ATR 321,Chief Justice Gleeson stated:
Tax avoidance involves using or attempting to use lawful means to reduce tax obligations. Tax evasion involves using unlawful means to escape payment of tax.
This line between avoidance and evasion becomes blurry in the case of Crypto. The ATO has difficulty tracking capital gains for crypto – this creates a temptation not to declare gains. That would be a mistake, however. To understand why, consider the tax rules for crypto set out below.
The ATO treat:
- exchange from one cryptocurrency to another;
- the trade, sale or gift of cryptocurrency; and
- conversion from cryptocurrency to a fiat currency
as subject to capital gains tax. This applies to all the assets of an Australian tax resident, as well as the Australian assets of a non-resident.
There is a ‘personal use assets’ exemption to capital gains tax, but this is unlikely to apply to an entrepreneur running a crypto business. It explicitly does not apply where the gain was part of a ‘profit-making scheme’ or ‘in the course of carrying on a business’.
Note, where the individual is trading crypto as a business, such as regularly buying and selling for short term gains or running an exchange, profit would be taxable as personal income rather than capital gains.
Read more about the tax obligations of Australian crypto businesses at The Complete Guide to Cryptocurrency Fraud for Australian Investors.
7. How might you reduce your personal income tax burden?
Given that it is likely that, in setting up a Cayman exempt company, you won’t avoid a personal income tax burden in Australia, what options are there to reduce your tax burden?
The most obvious option is to forgo a salary/contribution. If you can forgo a salary, or any distributions from the business for a necessary period, this may be enough to lose Australian tax residency and therefore no longer be liable for personal income tax. Otherwise, the personal income could be kept as small as possible early on. It is more difficult to apply this mechanism to capital gains in the event that the business succeeds and returns are realised (these gains are not ‘up to you’ in the same way).
Note, handing in your Australian passport would not automatically remove Australian tax residency (see the test outlined above). There is a global movement that favours handing in your passport and taking up passports in low tax jurisdictions as a remedy for avoiding Australian, British, Canadian or American tax regimes.
8. Might you be liable to pay tax anywhere else?
When you set up an exempt company in Cayman, your tax obligations may not just be limited to tax obligations in Australia or Cayman. You may also incur tax liabilities in other countries.
If you have a branch of your business in another location which is a fixed place of business through which you carry out your business, you may have created a ‘permanent establishment’ there. This makes you liable for corporate income taxes there (from the perspective of the tax authorities, you have an overseas ‘branch’ in that location).
Note also, that new digital services taxes apply to sales of digital services in some countries, even if you are not based there. This applies, for example, in Austria, France, Italy, Poland, Spain and the UK. This tax is between 1 and 8 percent.
Cayman Islands as a startup location
While Cayman has a lot of advantages as a startup location, it is not likely to be a long-term solution. In truth, it may be a 1 or 2 year option. As the business grows, it is going to need funding, employees and business partners. This can be more difficult to achieve while based physically in Cayman. However, in that case it will still be possible to keep a presence in Cayman, while setting up branches or subsidiaries elsewhere (such as in the US). By setting up in Cayman, if the business fails, it will be easy to close down. Winding up procedures in Cayman are straightforward.
Whether you decide to go with an offshore Cayman company or not, it is fair to say that becoming a digital nomad isn’t supported by the Australian Tax Office. You are still likely to be taxed, at least initially, in Australia. The best the entrepreneur may be able to achieve is corporate tax residency for their business, as long as they physically move to, and reside in, Cayman.